ANALYSIS OF PRADHAN

MANTRI FASAL BIMA YOJANA

Animesh Raj Gupta
Roll P36011

Assignment Rural Finance

Background
Despite of implementing several crop insurance schemes, farmers are yet to get enough protection
from risks in farming. The reason for thousands of farmers killing themselves every year is not just
because of climatic factors; it is also due to the protection from risks, in terms of crop insurance, is
not reaching them when they need it the most. This is because all the crop insurance models put in
place so far since 1970s have met with limited or no success.
Since 1985, there have been crop insurance schemes in the country, when the Congress Government
had launched a comprehensive Crop Insurance Scheme (CCIS) 1985. Further, in 1997-98, the
Government re-launched the scheme but it continued till 1999. Again in 1999, Government launched
a new scheme, namely National Agricultural Insurance Scheme (NAIS) but there were some
loopholes in the scheme. The NAIS scheme was implemented only in 14 States of India. The
insurance settlements were handled by the insurance company named, Agriculture Insurance
Company of India Ltd (AIC). Under NIAS, the insurance premium rates were 1.5 % to 3.5 % of the
total sum assured for food crops like pulses, oilseeds, cereals, etc. But, for commercial crops like
cotton and horticultural crops, the actuarial premium rates were charged. Further, the NIAS facilities
were given according to the areas where the calamities are frequent and later it was converted into
MNIAS i.e. Modified NIAS. The MNIAS was also not a successful project as it was applied in 6
States of India. These schemes were not successful because of several reasons like low awareness,
low sum insured amount and slow claim process etc. The NAIS and the MNAIS were not serving the
farmers interests well and suffered from lacunae. The sum insured under MNAIS, particularly for
risky crops and districts, was meagre and was based either on the quantum of crop loans or on the
capping of the sum insured. The crop damage assessment method based on crop cutting experiments
was very slow and time-consuming. The time taken for compensation to reach the farmers often ran
into several months.
Pradhan Mantri Fasal Bima Yojana (PMFBY) was launched by the government in January 2016 to
replace the existing two crop insurance schemes in India, National Agricultural Insurance Scheme
(NAIS) and Modified NAIS. Under this new crop insurance plan, the premium rates will be
discounted from the existing rates for all types of crop like Kharif crops, Rabi crops, horticulture
crops and commercial crops. As PMFBY, the premium will be 2% of the sum insured for Kharif
season crops and 1.5% for Rabi season crops. The rates are also applicable for oilseeds. The
premium rates for commercial crops like cotton and other horticultural crops will be 5% of the
insurance sum assured. The Government has also stressed on the use of technology to provide a
strong insurance scheme to farmers and make the process efficient and fast. At present, only those
farmers who have taken loans from the Government for their cultivation is eligible for insurance of
their crops. But according to the new scheme, all farmers whether he has taken a loan or not, is
eligible for the new crop insurance scheme. The insurance plan will be handled under a single
insurance company, AIC and entire insurance process, right from joining of farmers to disbursement
of claim is to be made electronically to make it a fraud free and effective scheme. This scheme will
be implemented throughout the country and will start its functioning from the next Kharif season of
crop harvesting, i.e. June. The insurance burden will be collectively taken by the centre as well as
State Governments. A total of Rs 17,600 crore has been approved by the cabinet, for the
implementation of the scheme.

Analysis of Scheme
This scheme is dedicated to bring in more than 50% of the farmers under its wing within the next
two to three years. Around 25% of the claims will be sent to the farmers direct account. Also,
the scheme will remain as it is. This means that there will be no cap on coverage. Also there
wont be any cap on the reduction in the insured sum.
Scheme will safeguard farmers against inclement weather. It will also reduce the financial
instability in the families of farmers
The crop insurance scheme will cover half of Indias cropped area in the next three years, up
from the present level of 23%. Towards this, the centre has substantially increased the budget for
crop insurance from Rs.2,823 crore in 2015-16 to Rs.7,750 crore in 2018-19.
The low premium will drive penetration and enrolment and make the insurance scheme viable
for insurers, it remains to be seen if the unit for assessing crop loss has been reduced to the
village level.
The decision implicitly acknowledges the structural makeover of Indian farming, which has
entailed farmers taking on more risks by diversifying into horticulture and commercial crops
without adequate safety nets
The agriculture ministry said in a statement that the premium rates are very low, with the
government contributing five times the premium paid by a farmer. The balance premium will be
paid by the government so that farmers are fully insured.
There is no cap on subsidy on premium, meaning the government will bear the cost even if the
balance premium is as high as 90%. In previous schemes, due to a cap on premiums, farmers did
not get the full sum during claim settlement.
The new scheme will cover local-level calamities such as hail storms and landslides and even
cover farmers if they cannot sow crops due to inclement weather. Also, the scheme will cover
post-harvest losses due to cyclonic and unseasonal rains.
While smartphones will be used to capture and upload data on crop cutting (to estimate loss in
yield) to reduce delays in settling claims, remote sensing will be used to reduce the number of
crop-cutting experiments.
Under PMFBY, there will no upper limit on government subsidy and even if balance premium is
90 per cent, it will be borne by the government. Earlier, there was a provision of capping the
premium rate which resulted in low claims being paid to farmers. This capping was done to limit
government outgo on the premium subsidy. This capping has now been removed and farmers
will get claim against full sum insured without any reduction
Implementing the scheme in mission mode, will entail huge premium subsidy outgo, more so in
a drought year. The implicit assumption seems to be that if low premiums attract more farmers,
the increased insurance penetration and crop area coverage will succeed in driving down
actuarial rates, as it has happened with mobile call charges.
 The success of the new scheme will depend on the support of State Governments. While the
Central Governments support is ensured, it is not clear as to how many State Governments will
support the scheme and pay their part of the expenditure (premium). If most states are unwilling
or unable to pay, the scheme may not take off in a big way as expected.
It will be good if the farmer is enabled to recover his full loss. That will depend on how the sum
insured is determined. At the minimum, the sum insured has to be the input costs plus a
percentage to cover the farmers loss of income. In other words, the policy has to be valued
policy instead of being a contract of strict indemnity.
From the insurers side, the cover will be reinsurance driven since the losses can be catastrophic.
Hence, the ability to quote for the cover will be dependent on how global reinsurers rate the
risks. However, it is quite possible that some insurers quote rates on their own and retain the risk
on their books if no reinsurance is available on the rates quoted by them. It is not clear as to how
the total expenditure is estimated but appears to be a modest estimate.

Critical Appraisal
Thus, new crop insurance scheme has the potential to deal with the vagaries of nature on Indian
farming. The premium to be paid by the farmers is kept low when compared with earlier crop
insurance schemes. However, the scheme will increase the financial burden on the government and
necessary budget allocations should be made. Some states like Punjab may face financial constraints
in encouraging famers to take up crop insurance. The scheme also does not address the demand of
farmers to cover the risks and losses inflicted by wild animals like elephants and wild boars. The
wild animals pose risks to farmers in peripheral areas of national parks and wild life sanctuaries.
Besides, losses from nuclear risks, riots, malicious damage, theft, and act of enmity, are all
categorized under exclusions in the new scheme.

Challenges in Implementation
Success of any government scheme depends on its sincere implementation. The key problems
such as poor land records, flawed land titles, corruption etc. are common challenges any
crop insurance scheme in India faces. Further, the success of the scheme depends on how
sincerely it is implemented by the insurance companies. Further, we need to wait and watch
as to how the scheme is monitored and supervised.
This scheme has witnessed an increase in the actuarial premium, instead of coming down
with the increasing scale of coverage. A major reason for this is high price charged by various
insurance companies to increase their profits. The competition in the upcoming seasons will
reduce this rate of premium and reduce cost to the government.
Areas in eastern Uttar Pradesh, Bihar and Assam which faced floods and subsequent loss to
farmers saw inspections being done by human eye.
Drones were not employed and smart phones which had to be issued to field officials, as per
guidelines, were also not issued.
States failed to pay premiums to companies in advance in many cases.
There has also been a delay in compensating the farmers.
 The scheme does not cover the risks and losses inflicted by wild animals like elephants and
wild boars which is a major problem in certain states.

Way forward
Going forward, in my view, an integrated bank database (using the Jan Dhan, Aadhaar, Mobile
platform) can ensure that the area insured for a crop does not exceed its gross cropped area, by
preventing multiple loans being taken for the same land. The growth of weather based insurance and
the entry of more players can provide checks and balances, but the insurance regulator should
prepare for fresh challenges. To reduce fraudulent claims, a robust no-claims bonus will help. As for
the demand side, while the Centre has declared a plain vanilla plan, there could be takers for
products that, insulate against price risk. A fixed deposit model may also find acceptance.